Fitch Downgrades BR Properties' IDR to 'BB-'; Outlook Stable

RIO DE JANEIRO--(BUSINESS WIRE)-- Fitch Ratings has downgraded BR Properties S.A.'s (BR Properties) foreign currency and local currency Issuer Default Ratings (IDR) to 'BB-' from 'BB'. At the same time, Fitch has downgraded the company's national scale long-term rating to 'A+(bra)' from 'AA-(bra)'. The Rating Outlook for the corporate ratings is Stable. A full list of rating actions follows at the end of this release.

The rating downgrades reflect BR Properties' weaker cash flow generation capacity and asset base due to the negative business environment and the relevant sale of assets, which should result in an increase in leverage and lower interest coverage ratios. Fitch expects that the lower scale and less diversified portfolio of properties following the sale of assets will not be counterbalanced by a significant leverage reduction. Despite the company's efforts to reduce debt level, net leverage should range between 5.0x and 6.0x in 2016 and 2017, as per Fitch's projections. Liquidity is healthy and represents an important rating consideration.

Vacancy rates increased and lease spreads was below inflation rates, due to weak demand for commercial properties that is directly related to Brazil's macroeconomic conditions. Fitch forecasts Brazilian GDP will fall 3.5% in 2016 and inflation and interest rates will remain high. This scenario adds significant risk to BR Properties' business and more volatility to its results.

KEY RATING DRIVERS

Operational Cash Flow to Remain Pressured by Challenging Macroeconomic Environment

BR Properties' cash flow from lease agreements will reduce in 2016. The negative business environment, with increased vacant areas and below inflation lease contract adjustments, combined with the lower scale of operations will negatively affect the company's EBITDA generation. Fitch projects EBITDA to reduce to about BRL340 million in 2016, from BRL591 million in 2015. Fitch's projections consider office vacancy rates of 20% and leasing spreads below inflation rate.

In 2015, BR Properties generated negative cash flow from operations (CFFO) of BRL54 million as per Fitch's calculation, negatively impacted by high interest expenses. Investments of BRL56 million and dividends distribution of BRL663 billion, including BRL599 million of extraordinary dividends, resulted in a negative free cash flow (FCF) of BRL773 million in 2015. BR Properties received BRL1.6 billion from sale of assets during 2015 (net of taxes and debt payment of BRL848 million) and received BRL355 million in February 2016. Interest coverage, measured as EBITDA /interest ratio, reduced to 1.1x in 2015, from 1.3x in 2014, and Fitch expects interest coverage close to 1.0x during 2016.

Less Diversified Portfolio

BR Properties remains as the largest Brazilian commercial properties company, with high quality of the properties and of its tenant base, despite the sale of properties. However, weaker diversification and lower scale of operations reduce flexibility during difficult market conditions, as the portfolio is now concentrated in office buildings. The estimated market value of properties reduced by about BRL6.4 billion since 2013, to BRL6.7 billion at the end of 2015 (excluding projects under development).

Fitch also considers high the customer concentration, with the five and 10 largest tenants representing about 51% and 65%, respectively, of the company's revenues in 2015. The company has a strong concentration with its largest tenant, Petrobras. This contract is currently under revision and, according to the company's expectations, should be signed by May 2016.

BR Properties financial flexibility from its unencumbered assets materially reduced. As of Dec. 31, 2015, unencumbered assets had an estimated market value of BRL2.3 billion, which may be available for sale or serve as collateral for a secured financing, if needed. The estimated value of unencumbered assets covered about 1.3x of unsecured debt of BRL1.8 billion (2.6x as of December 2014). On a pro forma basis, considering the sale of assets concluded in the beginning of 2016 and the USD100 million perpetual bond amortization, unencumbered assets covered about 1.6x of unsecured debt.

Leverage to Remain Moderate in the Medium Term

BR Properties used part of proceeds from the sale of assets to reduce debt during 2014 and 2015. As of Dec. 31, 2015, total debt was BRL3.6 billion, compared to BRL4.2 billion in December 2014 and BRL5.6 billion in December 2013. Net debt reduced to BRL2.4 billion, from BRL3.6 billion and BRL4.6 billion, respectively.

Fitch projects the company's net leverage will be between 5.0x and 6.0x in 2016 and 2017, despite the expected debt reduction. In 2015, total debt/EBITDA ratio was 6.1x and net debt/EBITDA was 4.1x, and compare with 5.7x and 4.9x, respectively, in 2014. Relative to the value of the company's property portfolio, loan-to-value ratio was 52% and 34% on a net basis, in December 2015.

Vacancy Rate Remains a Concern

Vacancy continued to increase, pressured by difficult business environment. In the fourth quarter of 2015, financial vacancy was 10.4% and physical vacancy was 14.3%, compared to 8.6% and 7.3%, respectively, in the fourth quarter of 2014, and is not expected to reduce in the short term. Higher stock in the market also contributed to lower leasing spread, of 0.1% in the fourth quarter of 2015, considering same properties, and lower than average inflation rates. About 13% of the contracts (by revenues) will expire in 2016, while 11% of the contracts have market alignment scheduled during the year, which could continue to pressure the company's average rent. However, this position is better compared to 2015, when the company had 30% of the contracts (by revenues) under market alignment.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--Office vacancy rates between 15% and 20%;

--Reduction in average rent of 10% in 2016;

--Sale of assets of BRL355 million (concluded in February 2016);

--Net leverage between 5.0x and 6.0x;

--No dividends in 2016;

--Base case does not consider relevant change in the company's strategy if the tender offer from GP Investimentos is concluded.

RATING SENSITIVITIES

Future developments that may individually or collectively lead to a negative rating action includes:

--Increase in net leverage to levels above 6.0x;

--EBITDA to gross interest expense coverage ratio consistently below 1.0x;

--Liquidity falling to levels that considerably weaken short-term debt coverage;

--Vacancy rates consistently above 20% and higher delinquency rates, which could result in a reduction in operational cash generation;

--Sale of assets that results in a weaker portfolio of properties, with a significant reduction of the company's cash flow generation capacity.

Positive rating actions are not expected in the medium term.

LIQUIDITY

BR Properties' liquidity is strong and benefits from the sale of assets. Fitch incorporated that the company will preserve relevant cash balance and that it will not be pressured by relevant dividends distribution. As of Dec. 31, 2015, total cash and marketable securities was BRL1.2 billion and total debt was BRL3.6 billion. Cash covered short term debt of BRL689 million by 1.8x. Fitch expects BR Properties to continue to use the proceeds from the asset sale to reduce debt by about BRL1 billion in 2016. The company has debt maturities of BRL565 million in 2017 and BRL453 million in 2018, that are expected to be refinanced.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings for BR Properties:

--Long-term foreign currency IDR to 'BB-' from 'BB';

--Long-term local currency IDR to 'BB-' from 'BB';

--USD285 million senior unsecured perpetual notes to 'BB-' from 'BB';

--Long-term national scale rating to 'A+(bra)' from 'AA-(bra)'.

The Outlook for the corporate ratings is Stable.

Summary of Financial Statement Adjustments

--No adjustment.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002097

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002097

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160406006571/en/

Fitch Ratings
Primary Analyst
Primary Analyst
Fernanda Rezende
Director
+55-21-4503-2619
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP: 20010-0103
or
Secondary Analyst
Jose Roberto Romero
Director
+55-11-4504-2603
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55 21 4503-2627
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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